Vertigo on the tight rope – business survival with high stakes US-China trade dispute

Australia is caught in the cross fire of an incredibly complex geopolitical struggle between the US and China, both vitally important partners. Adherence to long-standing post war institutions, rules and protocols is being severely tested and both sides have drawn battle lines which makes any material form of compromise to reach a solution in the near term very difficult.

Recent global stock market turmoil in response to escalating trade tensions has materially affected Australian investors, with the ASX falling 6 percent or roughly AUD120 billion since 30 July. KPMG estimates this ASX movement equates to a fall of between AUD30-40 billion in superannuation funds for Australian families.

Unfortunately this might only be a prelude to the full economic impacts ahead of us. KPMG previously estimated that Australia’s economy could be 3 percent lower than it otherwise would be, equating to some AUD55 billion, due to the escalating trade war spilling out beyond the real economy into financial markets.

The stakes for Australian businesses are very high, given Australia and China’s strong economic relationship and our geographic location in the Asia Pacific region.

Australia’s interests

The relative scale and structure of our commercial relationship with China is very different to that of the USA. Put simply, their trade issues are not necessarily ours.

The USA had a USD380 billion trade deficit with China in 2018 whereas Australia enjoys a very large trade surplus which accounts for more than 30 percent of our total exports.

Two-way goods and services trade with China has risen by a staggering 42 percent since the China-Australia Free Trade Agreement came into force at the end of 2015, to reach a record high of AUD215 billion in 2018. Australia has now enjoyed 46 years of constructive and beneficial trading engagement with China which has been incredibly beneficial for many Australian companies and employees and which has enabled an accelerated return to budget surplus.

Foreign investment from China has also been very important in maintaining our national economic growth over the last decade.

Based on research conducted by KPMG and the University of Sydney, more than AUD100 billion of Chinese investment has flowed into Australia’s economy since 2007. We’ve been the second largest single country recipient of Chinese direct investment.

Yet in 2018, despite a 4 percent increase in Chinese overseas direct investment globally, Chinese investment into Australia fell 37 percent to AUD8 billion, although not as much as Chinese investment in the US which was down 85 percent and in Canada, where it was down 47 percent.

In 2013, state-owned enterprises accounted for 90 percent of Chinese investment in Australia. But since mid-2018, SOE investment has slowed right down.

Private Chinese companies accounted for almost 90 percent of total Chinese investment in Australia in 2018, investing health, real estate, renewable energy and food production. But 80 percent of Chinese executives who KPMG surveyed have confirmed they are facing greater difficulties and delays in getting capital approved and transferred out of China.

Wealthy mainland Chinese immigrants aren’t coming to Australia to the extent they were a few years ago, as evidenced by a 60 percent fall in the number of Significant Investment Visa applications in 2018.

How should we respond?

Maintaining independence and walking the tightrope between the US and China remains important to Australia’s national interests, but isn’t going to get any easier in the medium term. These tensions go well beyond trade and this geopolitical contest may last for decades.

Australia is a regional middle power, a strong, wealthy, independent country with a significant influential leadership role in the Asia Pacific. Our national government is carefully navigating a range of very difficult and complex issues related to rising US-China tensions in our region.

The Prime Minister’s recent foreign policy speech titled: “Where We Live” was balanced, independent and rules and values based, reflecting the well-established pillars of our foreign policy settings. Neither the governments of the US and China would have been entirely satisfied with the speech, which is appropriate in view of our own independent national interests.

Australia can’t and shouldn’t contemplate decoupling our incredibly important trade relationship with China, and Australian executives must continue to proactively engage with Chinese counterparts for trade as we have successfully for the past four decades.

However, we should continue to diversify commercial relations with other markets, including Japan, Korea, Indonesia, India and the ASEAN countries, where valuable free trade agreements are either in place or under negotiation. The Trade Minister’s recent visit to China to progress the Regional Comprehensive Economic Partnership is both positive and constructive.

Australian leaders must however directly address the increasing incidence of Chinese technical, non-tariff barrier issues for Australian exports including coal, barley, chilled meat, infant formula and other products. Recent market access issues are unfairly punishing Australian exporters, many of whom are medium sized businesses.

These complaints aren’t restricted to Australian exporters and there may be valid technical reasons for the Chinese actions that we need to understand and respond to if we are to maintain and grow in the China market. We are seeing other competing suppliers, particularly from South America, quickly securing licenses, quotas and growing their market share in China with less difficulty.

While we need to continue promoting Australia as an open, safe and attractive destination for Chinese investment and clearly explain our foreign investment policy regime, we may need to prepare for a period of reduced direct investment from China’s state owned sector, while actively pursuing investment from private companies and other international companies and funds.

We are in uncharted territory after a sustained period of prosperity and stability. While there are some things we can control, there is a great deal we can’t but the Australian business community needs to keep proactively engaging while developing a better understanding the issues being addressed and regulatory boundaries being set by our governments.

We’d all naturally like economic peace and prosperity to continue as it has for decades, but most Australian business leaders appreciate there is a need to work with our government leaders to carefully and jointly address a range of emerging issues to ensure Australia’s security, economic resilience and the ongoing harmony of our multi-cultural communities.